Risks of market timing
Market timing can be risky as waiting for the right opportunity to enter and exit the stock market can have its own risk. For example, just missing out on a few of the most important market days, which cannot be predetermined and therefore adequately timed, can actually be very costly to portfolios and make a big difference in the overall long-term returns.
In times of market volatility, some investors either increase their cash holdings or opt to stay in cash and wait for ‘the coast to clear’ before deploying that cash into the market. This market timing tactic also entails risk — the risk of missing out on some of the best return days, leaving investment portfolios behind in helping investors achieve their financial goals. Market rebounds off the lows in a volatile period can be unexpected and sometimes very strong. Investors risk missing out on those impactful up market days as they wait for the right opportunity. The chart below highlights such risks, where missing out on a handful of those impactful days can result in a meaningful lag in investment results compared to staying in the market for the total period.
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